2024 (10) TMI 255 - AT - Income Tax

Deduction u/s 80P(2) - interest income earned by a credit co-operative society from fixed/term deposits held with various co-operative societies cooperative banks - during the conduct of its principal business of providing credit facilities to its members deposits therefrom are accepted and to service interest liability thereon it in turn generated interest by placing them either into investment with other financial institutions or by lending them to other members - HELD THAT - In the present case the reasoning given by the tax authorities in denying the claim for deduction u/s 80P(2)(d) of the Act is that interest was received from banks has no legs to stand as a cooperative bank is principally a cooperative society and holds a banking license to operate on a larger scale under the guidelines of RBI. This issue was came to consider in CIT Vs Totagars Cooperative Sale Society 2017 (1) TMI 1100 - KARNATAKA HIGH COURT wherein their lordships referring to the decision of Hon ble Apex Court in the case of Totgars Co-operative Sales Society Ltd 2010 (2) TMI 3 - SUPREME COURT held that the ratio of decision of the Hon ble Supreme Court in the aforesaid case (supra) not to be applied in respect of interest income on investment as same falls u/s 80P(2)(d) and not u/s 80P(2)(a)(i) of the Act. The interest income earned by the appellant society from its investment held with other cooperative banks since being a registered co-operative society under respective state laws qualifies for deductions u/s 80P(2) - we vacate the balance disallowance retained by first appellate authority and direct the AO delete the disallowance in its entirety. The grounds accordingly stand adjudicated.

Summary

Issues:
Allowability of deduction u/s 80P(2)(a)(i) of the Income-tax Act, 1961 for interest income earned by a credit co-operative society from fixed/term deposits held with various co-operative societies & cooperative banks.
Eligibility for deduction u/s 80P(2)(d) of the Act for interest & dividend income derived by one cooperative society from its investment held with other cooperative societies.

Analysis:

Issue 1: Allowability of deduction u/s 80P(2)(a)(i)
The appeal challenged the denial of deduction u/s 80P(2)(a)(i) for interest income earned by a credit co-operative society from fixed/term deposits. The tribunal analyzed the nature of the society's business activities and the source of interest income. It concluded that the interest generated from investing liquid funds in other financial institutions qualified as business income under section 80P(2)(a)(i) as it was related to the principal business of providing credit facilities to members. The tribunal emphasized that the surplus fund theory did not apply to credit co-operative societies and allowed the deduction based on the specific circumstances of the case.

Issue 2: Eligibility for deduction u/s 80P(2)(d)
Regarding the eligibility for deduction u/s 80P(2)(d) for interest & dividend income derived from investments in other cooperative societies, the tribunal examined the legislative provisions and relevant case law. It highlighted that interest income earned from investments made with cooperative societies qualified for deduction under this section. The tribunal differentiated cooperative banks from cooperative societies and referred to precedents to support its decision. It emphasized that the interest received from cooperative banks, being cooperative societies under state laws, was eligible for deduction u/s 80P(2)(d) of the Act. The tribunal overturned the decision of the tax authorities and directed the deletion of the disallowance, allowing the appeal of the assessee.

In conclusion, the appellate tribunal allowed the appeal of the assessee, holding that the interest income earned by the credit co-operative society from investments in other cooperative banks qualified for deductions under sections 80P(2)(a)(i) and 80P(2)(d) of the Income-tax Act, 1961. The tribunal provided a detailed analysis of the legal provisions, case law, and specific circumstances of the case to support its decision.